|S&P 500||1.13%||14.88%||10.76%||Large-cap stocks|
|Nasdaq Composite||1.68%||21.00%||21.51%||Large-cap tech stocks|
|Russell 1000 Growth||1.54%||14.49%||13.27%||Large-cap growth stocks|
|Russell 1000 Value||1.48%||17.54%||11.82%||Large-cap value stocks|
|Russell 2000 Growth||2.06%||24.31%||19.49%||Small-cap growth stocks|
|Russell 2000 Value||1.74%||22.78%||16.54%||Small-cap value stocks|
|MSCI EAFE||2.56%||19.25%||9.68%||Europe, Australasia & Far East Index|
|Lehman Aggregate||-0.20%||2.50%||3.93%||U.S. Government Bonds|
|Lehman High Yield||2.88%||10.10%||18.49%||High-yield corporate bonds|
|Carr CTA Index||-0.89%||5.36%||10.28%||Managed futures|
|Through June 30, 2003.|
Indexed investing is a strategy that is designed to match the return of a given asset class. As a practical application of the efficient market hypothesis, which states that generating market-beating returns is all but impossible, low cost index products have managed to beat the majority of their actively managed peers. Can something that works so well with equity and fixed income investments also apply to hedge funds?
A fair number of enterprising firms, including Standard and Poor’s and CSFB/Tremont, believe that it can. But this process may not be as straightforward as one might think. In fact, it is the significant differences between alternative and traditional investing–and not the similarities–that will determine whether indexing is useful among hedge funds and managed futures
The most often-used proxy for the stock market is the Standard and Poor’s 500 index, which consists of the most liquid and largest publicly traded U.S. companies. Because this index is dollar-weighted, an indexer can come close to mimicking its returns by purchasing the fifty largest stocks, which collectively account for a large percentage of the float of the index. This allows institutions with relatively modest dollar amounts to closely follow the index, since direct replication is difficult for all but the largest investors.
Hedge fund indexers have borrowed from this concept, with many of them stating that to replicate the returns of the more popular alternative benchmarks, an allocation to only the largest managers is necessary. But in the real world, this approach means using only the largest available funds, since the best and brightest are closed to all but the most connected investors.